Businesses that went public by merging with special-purpose acquisition companies (SPACs) in the past three years wrote off $11.57 billion in so-called “goodwill impairment charges” in 2022, The Wall Street Journal reported.
The charges erase the premium investors paid above a company’s book value.
A SPAC or “blank-check company” is a special category of company that goes public, typically at $10 a share, even though it has no assets. When it has stockpiled enough capital, the SPAC buys and merges with a promising company that is not prepared to go public through the usual regulatory channels.
After the merger, the SPAC disappears, and its shareholders then own shares in the company the SPAC bought.
SPACs became a Wall Street frenzy during the COVID War, raising $95 billion and, at one point, making up 70 percent of all initial public offerings.
We documented SPAC Fever extensively in articles including:
● “SPACs Beware!” (13 Apr 2021)
● “SPACs’ Value Shrinks Under Regulators’ Scrutiny” (20 Apr 2021)
● “SPACS: Here Today, Gone Tomorrow?” (8 Jun 2021)
● “SPACs: Danger Ahead” (29 Jun 2021)
● “Knives Are Out For SPACs” (24 Aug 2021)
● “Investors Turn Their Backs on SPACs” (24 May 2022)
Because SPACs’ takeover targets are private companies that have not filed papers to make a stock offering, they can make unsupported, blue-sky financial projections about their future, which companies planning to go public by the usual route are banned from doing.
SPAC fever cooled in late 2021 and early 2022 as inflation sped up and caution replaced reckless abandon among individual investors. Many start-ups brought forth by SPACs failed to meet their promises.
Companies writing off at least $1 billion in unfulfilled projections include crypto business Bakkt Holdings, 3D printing firm Fathom Digital Manufacturing, and Aurora Innovations, a self-driving car venture, according to research firm Kroll.
“The [goodwill] impairments are this big red flag that they threw a bunch of money down a hole in the ground and it didn’t work out,” Elizabeth Blankespoor, an accounting professor at the University of Washington, told the WSJ.
“The question I would ask,” she added, “is ‘How do I know you’re not going to do the same thing with any more money you get?’”
TREND FORECAST: As we stated in “SPAC This, Pal” (7 Mar 2023), SPACs will not experience a similar rise in the lifetimes of anyone who can remember their spectacular crash in the past two years.